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Funding Inheritance Tax

Once a Personal Representative / Executor of a Will is appointed you may quickly know from the people dealing with your probate if it is likely Inheritance Tax is due on the Estate.  Your personal representative will want to pay inheritance tax from your estate (unless you have stated otherwise) so it is vital that you have made provision for that.  A personal representative must have arranged very early on to be able to fund the Inheritance Tax.  Why?  Because payment is due at the end of six months after a person has died.  If you do not, HMRC will start to charge interest.  Further, if Inheritance Tax is owing, the courts will not issue a Grant of Probate bringing with it a new set of difficulties.

 

You need to ascertain whether there is a likelihood you will pay Inheritance Tax therefore, as quickly as possible and make provision for it or your beneficiaries could find themsevles in a very difficult position.  You will certainly understand the value of your assets if you create a Will with a qualified person which may also give you the opportunity to do some planning such as our Wholelife Planning that underpins our Will making.  The Inheritance Tax threshold was due to increase in 2021 but it has been frozen for 5 years, until 2026.  Since the freeze in 2021 the government has already collected additional significant sums in Inheritance Tax from people who may not have had to pay it before.  You may have seen a number of articles on families who have found themselves in very difficult situations, including selling their family homes, as they now find they cannot otherwise fund the Inheritance Tax bill. 

 

40% is a lot of money to find quickly from an estate, particularly where assets are not necessarily liquid or readily available to turn into cash, plus of course the sale and purchase of any further property may further erode your estate with the significant stamp duty tax.   Whilst there has been significant lobbying since 2020 to have this 40% tax reduced to 10%, it is not currently the case and despite rumours, no changes were made in 2024. 

The current inheritance tax threshold is £325,000.  This can be joined with a spouse's allowance also of £325,000.  So, if you are married, you may have a total of £650,000 tax free.  If you are single, this is not the case.  There is an additional tax allowance called the Residential Nil Rate Band also per person.  This can give you an additional £175,000 each and extends to close family members not just the spouse.  Again this is also frozen.  

The good news is the inheritance tax is calculated on the amount over this allowance.  You may think that means that it is not likely to apply to you.  Beware though, long marriages and remarriages can increase your asset value and we all know of Aunt's and Grandparent's who bought a house 30 or 40 years ago for what we would think of as a small sum, which now has a value in excess of the Inheritance Tax threshold and is now being left to you, so its either inheritance tax or capital gains tax to deal with.  This could apply to any of us.  So it may be surprising to find that your assets may exceed the inheritance tax threshold once things have been added together.  Everything you own including your personal possessions and home contents are expected to be valued for the purposes of probate.  Add that to bank accounts or shares and your estate is growing.  It becomes clear why it is a particularly hated tax.  For the most part, our estates do manage to pass free of inheritance tax, particularly if you are married.  However, whether single or married, if you undertake some planning in later life and start gifting to your family or beneficiaries you can reduce your liabilities significantly.

 

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Funding for IHT may be obtained from a variety of sources.  Sometimes a specialist loan is required.  This is often an area of planning that people have not considered which is why they can find themselves in difficulties.  Sometimes the main asset is a house that was not expected to be sold as it is also a home to another family member which you may also have granted a life interest to.

 

By far the best advice is to plan ahead and be prepared so as to avoid or reduce the stress, anxiety and unpleasant surprises that often go with administering the estate of someone who has died.

 

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One of the best ways to avoid inheritance tax and preserve the inheritance for your beneficiaries is to actually reduce the size of your estate by distributing what you can to your beneficiaries ahead of your death. 

Consider this basic sum and basic calculations :  you have a house worth £650,000.  A vintage car worth £15,000.  A pension worth £450,000 which may have say £50,000 left when you pass.  A total of £715,000.  Add car, jewellery and other items and maybe add £30,000.  A total now of £745,000.  If you are married, there is still no inheritance tax payable if you are still entitled to all of your inheritance tax relief, eg nothing already given away.  A parent or uncle has died and you are inheriting half the house and other assets including the bank accounts and remainder of pension and now your estate has had £300,000 added to it.  You are now worth £1,000,095.  So let's say you are still entitled to the whole of your inheritance tax relief ( still nothing has ever been gifted for example):  

 

you are now liable for :   40% of £95,000, ie £38,000. 

 

Or higher :  imagine if you and your spouse are already at the inheritance tax threshold and then each of you inherits assets to the value of £200,000 over time.  Now you have to find 40% of £400,000.

 

You are now liable for an inheritance tax liability of £160,000. 

Does your estate have investments, cash, pension funds etc readily available, ie within six months?   Maybe you have been putting funds into savings and investments for a "rainy day"?  Will you be relying on the sale of something, eg a second home or shares?  All of this consideration constitutes a form of planning,  There are a number of options to fund your potential inheritance tax liability.

You may be worried you are or could become liable for inheritance tax and would like to have that assessed.  You may also like to consider some planning and ways to fund that. 

An informative article written by KWW London solicitors describes the various ways you can pay IHT and why that can be difficult.  For help and advice on navigating IHT should you be liable for it you may speak to our probate solicitors with whom we work.

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Please call and book an Inheritance Tax Assessment consultation with us. 

From this it can be advised as to the likelihood of inheritance tax liabiliity and your provision to pay for it.  (Note:  The actual amount only HMRC can calculate "on the day" given all rules, reliefs and liabilities and valuations they take into account).  From here, meaningful planning can take place to give you an informed position of how any tax liability can be paid in a structured and planned manner.  (Note:  Any financial advice must come from an independent financial advisor, either your own or one we use.  It may be concluded you seek further information on financial advice or products.  You may bring that information back to be included in further planning discussions if you wish.)   We will discuss with you possible options and the ways in which you might be able to utilise in planning, or gift your current and anticipated assets in a way that best suits you.  Were you aware, for example, that there is an inheritance tax exemption for gifts out of surplus income?  Please discuss with us.

Of course from this, you will have gathered information you can use to create or review a Will if you wish.  If you instruct us to make a Will you will have already covered this area of planning usually undertaken on a non standard Will and therefore those planning costs will not be duplicated, costs subject of course to client requirements. 

 

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